Life insurance is a critical financial tool that offers protection and security to your loved ones in times of need. The payout from the insurer can help your family meet their essential expenses, critical goals like education, payoff liabilities, etc. Hence, having proper coverage is essential to build a solid financial foundation for yourself.
If you are unsure of the amount of term cover you should buy for yourself, you can check this calculator here. Term insurance is the best way to go about life insurance due to its simple nature and low-cost structure. It is best to avoid mixing insurance with investment. Insurance is a means to compensate for unforeseen financial losses and not a vehicle to earn returns. In this blog, we will understand how nomination differs in life insurance policies.
Nominee In Investments Vs Nominee In Life Insurance
When you appoint someone as a nominee in your investments, they act as a trustee rather than the outright owner of your assets. It is crucial to understand that nomination does not confer ownership rights; rather, it vests the nominee with the responsibility of distributing the claim amount in accordance with legal heir rules or a Will. Assets transferred to a nominee can be claimed by legal heirs.
However, nomination in life insurance doesn’t work the same way due to the presence of a concept called Beneficial Nominee. This change was brought in by the Insurance Regulatory and Development Authority of India (IRDAI) to mitigate potential legal disputes between nominees and legal heirs and streamline the death claim process in life insurance.
Under this rule, if you have nominated your immediate family members like parents, spouse, or children in the policy, the death claim amount becomes exclusively payable to them. Other legal heirs cannot claim the amount paid by the insurer. It means the amount would go directly to the beneficial nominee and they have the final legal rights over the sum assured. This is different from a normal nomination where the nominee is just a caretaker and is legally bound to distribute the assets received as per the inheritance law applicable to the deceased or as per the Will, if any.
The rule also simplifies procedures for life insurance companies and provides clarity regarding the rightful recipients of the death claim amount. Hence, it is imperative for you when buying life insurance to carefully designate the intended recipient of the death claim amount, particularly given the implications of the Beneficial Nominee framework.
Even in scenarios where legal heirs try to assert their entitlement to the death benefit, they would find their claims futile under the rules of beneficial nomination. The nominee is entitled to receive the death benefits, irrespective of any challenges from legal heirs.
Moreover, it is essential to consider factors such as insurable interest and Will when designating nominees. If you have nominated a non-relative as a nominee, the person will not be designated as a Beneficial Nominee. They will only be the custodian of the payout and the legal heirs can lay claim on the amount. Additionally, the presence of a valid Will can supersede beneficial nominee rights, directing the allocation of funds according to the insured’s wishes.
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~ Nischay Avichal
